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Thursday, May 14, 2009

Regulators Worried About Teachers Trust Fund But Not Your Tax Dollars

I got a big laugh reading that Indiana regulators are all up in arms that the Indiana State Teachers Association made some risky investments with its insurance trust fund but haven't a care in the world at the hundreds of millions taxpayers are shelling out to pay for risky variable rate interest bonds on which the Indianapolis Water Company, Capital Improvement Board and other state and local entities took a gamble. The Star's Bill Ruthhart writes:

The FBI and the Indiana Secretary of State's office are investigating the handling of what have been described as high-risk investments by the Indiana teachers' union in its insurance trust fund, a source close to the matter has told the Indianapolis Star.

The investigations come as Indiana State Department of Insurance Commissioner Jim Atterholt has raised concerns about an unusual level of high-risk investments that have landed the operation in financial hot water.

State regulators say the trust faces a potential $67 million deficit and could fall into insolvency as a result of those investments. As a consequence, school districts ultimately might have to assume some of the insurance claims now covered by the trust, though both state and ISTA officials say that would be unlikely to happen this year.

The Securities Division of Secretary of State Todd Rokita's office and the FBI would not confirm nor deny whether they were conducting investigations.

I'm not excusing the way ISTA handled its investments or questioning the need for an investigation, but I find a bit of irony here. Jim Atterholt, who sits on the Indianapolis Waterworks Board, voted last month to have taxpayers pay at least $85 million in prepayment penalties for its variable rate bonds without blinking an eye. Indianapolis water users are now being asked to pay 18% higher water rates to make up for the additional costs from the high-risk borrowing through the use of interest rate swap notes insured by companies that lacked the financial wherewith all to back up their insurance policies. ISTA practically operates as an extension of the Democratic Party. I suspect the interest in scrutinizing ISTA and not others has as much to do with whom the organization is not making political contributions as it does out of a legitimate public concern.

UPDATE: The Indiana Education Insight's Adam Van Osdol has more coverage on the ISTA investigation in the latest edition. He notes there are 13,000 school employees and their dependents who are covered by the ISTA's medical insurance plan. Over 90% of the teachers in Indiana are covered by ISTA's long-term disability plan. The primary concern is that the fund could fall into insolvency, in which case school districts would be on the hook to cover claims. The ISTA' s fund is currently facing a $67 million negative net worth. The ISTA fund is now seeking to turn over administration of health care claims administration to UnitedHealthcare as of July 1 and exit the business altogether. That deal is contingent on ISTA making a $4.7 million escrow payment today. Van Osdol says the $67 million shortfall, however, will remain and apply only to the long-term disability plan. ISTA's executive director, Warren Williams, has retired in the aftermath of this development. Last month, Trust Director Robert Frankel resigned. Van Osdol says ISTA Trust had asked recently for a premium increase of 20% (not much below the kind of increases I'm dealt annually by Anthem on my own health insurance plan) but dropped that idea out of fear many schools would drop their plans and choose less expensive plans.

7 comments:

I did more than "blink an eye". I was just appointed to the Board of Waterworks this past January. This massive and risky shift to variable rate bonds occurred long before I got here. We were just trying to fix the mess. Would you have preferred we do nothing? I also took steps to ensure the Board does not go down this road again. Please check the records of the past Board meeting.

Jim, Why no call for an investigation? It is the downgrading of the companies that insured those deals that contributed to the interest rates skyrocketing from 3.5% to over 9%. How can those companies get by making all of that money insuring deals that they in no way could possibly cover if the water company defaulted? You're the Insurance Commissioner and Todd Rokita is the Securities Commissioenr. I watched the meeting. You didn't ask a single question about why or how these bond deals were entered into. You didn't ask who recommended the deals? You didn't ask who benefitted from the prepayment penalties. You only asked a question about the policy the board adopted going forward to limit the percentage of debt in variable rate bonds. As I recall, you asked an Ice Miller bond lawyer, who was involved in the original transaction and she told you she was a bond lawyer and not a financial advisor. Given how much money her law firm made off of the original transactions, I thought you let her off pretty easy.

As I recall Atterholt was the one questioning the attorney at the meeting on why there couldn't more be more then 15 percent of variable rate bonds floated on the loan. He even asked if the board could change it in the future to the upside of 15 percent. I still wonder what in the world he was thinking? I still feel 15 percent is still way to much when rule of thumb is no more then 10 percent. Let it be said there is no free lunch and rules of accounting don't change through the years just the silly ways people come up with to bypass common sense. Jim didn't impress me at all at the meeting.

You are exactly right, we worry about ISTA but not the water company or the CIB.

If you review IC 36-1-3-8 it specifically states the penalties for improper investing of funds. So the question is were these investments authorized by statute and is the CIB and Waterworks subject to audit by the State Board of Accounts?

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INVESTMENTS NOT AUTHORIZED BY STATUTEPursuant to IC 36-1-3-8, a unit may only invest funds as expressly provided in the statutes.Investments should only be made in accordance with statute. Expenses related to any unauthorizedinvestments may be the personal obligation of the responsible official or employee.Losses related to investments and investment procedures which are not authorized by statute may bethe personal obligation of the responsible official or employee.

Guy, Your recollection of his question is spot on. "Clueless" was the word that came to mind when I heard his question. What qualified Atterholt to be Insurance Commissioner? He worked as a staffer in Dan Burton's office, served as a state representative and became a lobbyist for AT&T when he lost his House seat. Word is that he's now in line to become the new Utility Commissioner in the Daniels' administration. These choices to run our government in this manner across the board are destroying this country. Daniels is the best example. He worked in the Reagan Administration, went to work for Eli Lilly as a high-paid executive/influence peddler, made over $50 million, becomes governor and appoints people of like-mind to run state government. They're all out for themselves. Taxpayers are being screwed from D.C. to the local level by these self-serving bastards. I'm sorry to say it, but it is too late to save us. The die has been cast. The USA as we know it is on its way down faster than anyone could have imagined.

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